Decoupling Energy Profits from Sales

Electric utilities are in the business of selling electricity. And even though most utility sponsored energy conservation programs reward the utility handsomely for saving electricity, the lure of selling more and more is overpowering. The problem only gets worse in the era of electric competition since the regulatory incentives for utilities to help their customers save energy and use energy more efficiently are removed. To solve this inherent problem regulators have normally required divestiture of generation assets as a precursor to full retail competition – so former integrated utilities now become separate generation, distribution or transmission utilities. But this does not do enough to remove utility preferences to discourage distributed generation and energy efficiency.

Under volumetric sales ratemaking, distribution utilities make money by transferring as much electric power as possible over their wires to final customers. Every on-site power plant installed or energy efficiency action, therefore, equates to lost utility revenue.

Oregon may have found the solution to this problem. In mid-1998, the Oregon Public Utilities Commission adopted a performance-based ratemaking (PBR) tariff for PacifiCorp’s electricity distribution functions. The plan applies a “revenue cap” to each customer class. If actual sales revenues exceed the predetermined cap in any of the classes, the extra is set aside in a balancing account. The following year, the balancing account funds are given back to the utility if sales were lower than projected, and given back to customers if utility sales were higher than anticipated. In this way, the utility’s revenues are disconnected from the amount of electricity it distributes, thus eliminating any reason to discourage customer generation or energy conservation efforts. Ralph Cavanagh of the Natural Resources Defense Council calls Oregon’s plan “a wonderful new regulatory precedent.”

View the Oregon PUC’s PacificCorp’s Alternative Form of Regulation Order – Order No. 98-191 – May 5, 1998

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